With the pace of deal-making picking up momentum in the third and fourth quarters this year, the middle market for mergers and acquisitions is finally showing signs of life that are expected to continue well into 2014.
Most of the $671 billion in third-quarter M&A volume consisted of large market deals, led by Verizon’s $130 billion acquisition of Vodafone’s stake in their joint U.S. venture.
In the middle market, however, most investment bankers will likely tell you that the first nine months of 2013 was actually the worst first nine-month period for transactions since 2008. Driving this was a strong fourth quarter of 2012 that saw many deals get done in the face of potential tax law changes, which left the pipeline empty for many deal professionals for the early part of 2013.
Despite low interest rates and the availability of credit, as well as the stockpiles of cash sitting on many larger companies’ balance sheets, good conditions for deal making did not generate a lot of activity. But we’ve seen the more settled political climate and a gradually improving economy set in motion many more deals in the Northeast and the rest of the country for the back half of this year as compared with the front half.
Even the ailing consumer publishing sector is active, with M&A volume up 27 percent in the third quarter, according to Berkery Noyes, an independent New York investment bank. Amazon.com founder Jeffrey Bezos recently acquired The Washington Post for $250 million. And Red Sox principal owner John Henry paid $70 million in cash to buy The Boston Globe from The New York Times in a hotly contested process.
Another significant third-quarter transaction in the Boston area was Iron Mountain’s acquisition of Cornerstone Records Management for $191 million, subject to certain purchase price adjustments. Our firm has seen increased M&A activity across the board, from our work as deal counsel for Iron Mountain to other transactions in industries ranging from financial and business services to telecommunications and manufacturing.
Hurdles Ahead?
For private equity firms and companies that require debt financing as part of their merger plans, there is some concern that the possibility of rising interest rates will chill the ramp-up in activity.
However, a recent analysis by S&P Capital IQ Global Markets Intelligence group found that fears about rising interest rates slowing the M&A market may be unwarranted. As one example in the study noted, during a period in the late 1980s, when 10-year Treasury yields increased significantly, U.S. M&A volume rose almost 27 percent.
Another school of thought expressed by bankers at a recent Reuters conference in New York is that a potential spike in interest rates may simply spur companies to accelerate their merger plans in order to finance deals at more favorable rates.
Even continued uncertainty over the debt ceiling is unlikely to slow the pace of U.S. deal-making. Data from the S&P group showed that during the recent federal government shutdown, deal activity was unaffected, with 795 deals valued at more than $35 billion taking place during the 16-day period.
Other hurdles remain, however, such as healthcare costs and regulatory uncertainties. A downturn in the economy could also be an issue, although companies may have come to accept the current cycle of slow economic growth we’re in as the “new normal.”
The effect of Janet Yellen’s appointment to chair the Federal Reserve is also unclear. While her appointment, which must be confirmed by the Senate, is generally viewed as a positive for financial markets, it won’t be known until early next year when she takes her new post if she plans any changes to current monetary policy.
When’s The Right Time To Sell?
Despite the positive signs, sellers who are ready to exit now might take heed of the lessons from the fall of 2008, when the door slammed shut on many business owners holding out for higher valuations. That said, sellers who are not quite ready and are not forced to sell due to business concerns should generally take a long-term view, and not focus too much on immediate economic concerns. Preparations several years in advance of a sale to shore up a business and improve performance normally lead to a better valuation down the road and better bargaining power.
The best time for a business owner to sell is when she or he does not have to. A better price and better terms typically can be negotiated, when the owner has the ability to walk away from the deal.
Lewis N. Segall is a partner in the corporate department of Sullivan & Worcester’s Boston office. Email: lsegall@sandw.com
